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Digital vs. physical: How the video game industry learned from Microsoft’s missteps

UPDATED: Thu., April 30, 2020

The Xbox Series X is scheduled for release during the holidays. (Microsoft)
The Xbox Series X is scheduled for release during the holidays. (Microsoft)

For more than a decade, video games have been steadily shifting away from physical sales toward digital distribution, much the same as music and film. The transition creates opportunities for game publishers and consumers alike: cut down on production and shipping costs while offering the convenience of downloading products from the comfort of home.

But there are holdouts. Some gamers insist on physical media for a variety of reasons such as collecting, slow internet speeds, sharing with friends or the possibility of selling it later. Some even stick to CDs and cartridges to resist digital rights management, which exists to prevent illegal copying – but occasionally shoots honest consumers in the foot.

When you download a game, you’ve only purchased a license to play it. Casual phone game “Flappy Bird” was taken off the iOS App Store at the peak of its fame in 2014 due to legal troubles, and if you were unfortunate enough to own it but not have the game downloaded to a device, it was gone forever. Other notable examples include “Scott Pilgrim vs. The World: The Game” and “OutRun Online Arcade.”

But the greatest testament to the gaming community’s pushback against digital rights management is the backlash that followed the unveiling of Microsoft’s Xbox One in May 2013. According to Phil Spencer, lead executive of Microsoft’s Xbox division, the company considered making it a “purely disc-less console” – instead, it settled on a poorly received game licensing scheme.

All games, including physical purchases, would be bound to the user’s Xbox Live account. The user would only be able to share games with up to 10 “designated family members,” and whether a given title could be traded or resold would be left up to the game’s publisher. Finally, the Xbox One would require an internet connection at least once every 24 hours or else all games would be locked until it was reconnected to the internet.

Don Mattrick, then president of Microsoft’s Interactive Entertainment Business, responded to backlash with the statement, “We have a product for people who aren’t able to get some form of connectivity – it’s called Xbox 360,” referring to Microsoft’s previous home console. Just two months later, the company backpedalled on all of its proposed DRM restrictions. A month after that, Mattrick left Microsoft.

Four months later, the Xbox One hit store shelves. News of the company’s reversed decisions spread quickly, but the damage had already been done. To date, worldwide the Xbox One has sold 46.9 million units compared to PlayStation 4’s 106 million. Xbox’s figure isn’t bad until you consider in the previous generation of consoles, the Xbox 360 sold 84 million units vs. PlayStation 3’s 87.4 million. Yikes.

In 2013, the gaming world proved it wasn’t ready for games to be licensed rather than sold, much less ready to forgo physical sales altogether. The Nintendo Switch, released in 2017, features an expanded digital storefront but still supports cartridges. Late 2020 will see the releases of the Xbox Series X and PlayStation 5, and both systems will support digital and disc-based games.

None of the major frontrunners are ready to abandon physical game ownership despite a 60% drop in physical game sales from 2009 to 2017, according to Statista. Sony’s Q1 2019 financial results revealed PlayStation 4 digital sales outpaced physical for the first time ever. Regardless of those trends, a 2018 report from Nielsen states a majority of game consumers prefer owning a physical product. Why the apparent discrepancy? One word: discounts.

The Xbox Game Store, PlayStation Store and Nintendo eShop all run discounts on a wide variety of titles almost constantly. Downloadable PC game store frontrunner Steam is famous for its periodic holiday sales offering discounts in the range of 50%-90%. Offering discounts on a digital storefront is simple – meanwhile, a physical retailer like GameStop has to rent a space, handle shipping costs and pay its employees. It can’t afford to compete with those prices.

Unless you’re a used-game savant with connections, the cheapest way to acquire games is through digital downloads. As long as digital games are cheapest, players will continue to download their games, and the industry will continue catering to that demographic.

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